Review of Industrial Organization 19: 483–498, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Efﬁciency and Firm Ownership: Some New
Department of Economics, State University of New York at Buffalo, Buffalo, NY 14260, U.S.A.
Abstract. The paper investigates the effect of state ownership on efﬁciency of ﬁrms using an eco-
nometric model that allows for the separation of technical from allocative efﬁciency in a dynamic
setting. The estimation results, based on a sample of international airlines, suggest that state owner-
ship is associated with lower technical and allocative efﬁciency. State ownership’s effect on technical
efﬁciency is mainly a dynamic one – lowering the rate of cost decline, whereas its effect on allocative
efﬁciency is static – raising the level of costs. Thus lower technical, rather than allocative, efﬁciency
is the main reason for state-owned ﬁrms to be less efﬁcient than their private counterparts.
Key words: Efﬁciency, productivity growth, state ownership.
JEL Classiﬁcations: L33, D24.
There is a long-lasting debate in the economics profession about the relative ef-
ﬁciency of state-owned and private ﬁrms. Despite clear-cut theoretical arguments
in favor of private ownership, the empirical evidence is far from conclusive.
likely explanation for the inconsistent results is that previous studies have exclus-
ively relied on productivity or cost level as the efﬁciency indicator. State-owned
ﬁrms may have higher efﬁciency levels at a given point in time but lag behind their
private counterparts in the rates of efﬁciency improvement and hence in the efﬁ-
ciency levels in the future. Indeed, Ehrlich et al. (1994) found that state ownership
is negatively associated with the ﬁrm’s long-term rate of productivity growth or
cost decline. This essentially argues that state-owned ﬁrms are technically inefﬁ-
I thank Scott Atkinson, Isaac Ehrlich, William Hemlen, Lawrence Lau, Robert Pindyck, Larry
Southwick, Guofu Tan, Danyang Xie, and seminar participants at the State University of New York
at Buffalo and Hong Kong University of Science and Technology for helpful comments and sugges-
tions. I am also grateful to a reviewer whose suggestions have improved the presentation of the paper.
I alone am responsible for errors.
There are several comprehensive reviews of this vast body of literature. See, e.g., Borcherding
et al. (1982), Vickers and Yarrow (1988), and Boardman and Vining (1989). To avoid unnecessary
repetition, we do not attempt to provide one of our own in this paper.